Difference between a final good and an intermediate good and their treatment in GDP calculations
A final good is the commodity in the hands of the final user for example orange juice made from oranges while an immediate good is the commodity used as an input during the production of the final good for example, oranges used during the production of orange juice. In the definition of all economics of GDP, there were consultations and references to final goods and services. Since GDP is the total value in the market, there is justified need to specify them as the final goods. A big difference lies between the intermediate goods and the final goods. Final product, which could either be a good or service, is what is already in the hands of the last consumer or user. In the stores, a consumer buys orange juice but not oranges therefore orange juice is the final good. (MacAfee, 2009)
A good question now is what are the oranges that make the orange juice? The answer is oranges are intermediate goods. Following the definition that intermediate goods are the units of production for final goods which in this case ere the oranges. Final goods may not be completely similar to the intermediate goods since there is processing involved. Only qualities of intermediate goods are present in the final goods. For example, the smell and color of oranges remain the same. Content could also be the same but the only difference is form. Final goods are the processed commodities for the purposes of meeting the needs and wants of the final user. (Rittenberg, 2009)
When computing GDP, only the expenditures on final goods appear on the calculations. The reason why the intermediaries or the intermediate goods expenditures do not appear on the calculations is to avoid double counting. Double counting when a good gets into account for more than one time in the process of computing GDP. For the purposes of illustration, when oranges get into account and orange juice gets into account as well, there will be a double counting because oranges are also in the orange juice hence counted twice. (Glasner, 1997)
Grounds on why real GDP is not a good measure of the well-being of a nation
In the recent past, economists do not have trust in GDP in terms of the nation’s well being. They have been proposing for alternative measures like the GPI giving reasons why GDP is not good enough. Below are their outlined reasons.
GDP leaves out many goods by only counting money transactions
There are many disregarded important parts of the household economy. For example, most household tasks like caring for the children and the elderly, cleaning and general home maintenance, preparation of food and voluntary services do not get into account. During the calculations, GDP zero rates all these activities assuming they do contribute anything to the economy. This alone contributes a lot to distorted policies of the public. Incases where family act gets criticism of GDP reduction, the denigrations are baseless because it does not reflect the increments in many economies of the household initiated by the act. (MacAfee, 2009)
GDP takes care of all dealings as positive
GDP treats crime, pollution, reduction of natural resources and divorce as gains therefore treating social structure breakdowns and normal surroundings as gains, for instance, GDP goes up when a person buys a car, when the car gets into an accident, when the driver is taken to the hospital and when there is a follow up by the lawsuit. It does not distinguish between activities that diminish and those that contribute to the well-being. This scenario is like using a calculator with only the addition button but no subtraction button. GDP increases in an unreasonable manner as long as cash changes hands.
GDP accounts for natural assets reduction as current income
This is an obvious contravention of principles guiding good accounting. If a hotel converts into parking lots and airport as a playing ground, GDP will treat all the money involved as up to date income and nowhere will it account it as depreciation of capital. Any company treated this way would never realize its stand and so is the country that relies on GDP to measure its well-being. The above statements clearly explain why real GDP is not a useful statistic. If it were a useful statistic, it would not take into account depletions as current income. (Rittenberg, 2009)
Different sorts of expenditures made by the Federal government
There are two categories of spending made by the federal government, namely discretionary
spending and transfer payments. All the spent money by the government has an effect on the economy. The government is big enough that it can spend when there is contraction of the economy therefore boosting the consumer confidence and the economy. Even without the realization of many who have been in the position of making monetary decisions, there have been the use of both discretionary and transfer payments.
During the government spending for example funding a bridge, there are many choices involved but in transfer payment, there are no choices and it is almost mandatory. For example, when paying taxes and other important bills from the government, transfer payments remains the only choice. Transfer payments have been on the increase in the recent past because it is convenient and easy to transact. It is also direct and no problems like frauds are nowhere around the process.
Business cycles
In the history of the United States of America, there have been two major economic recessions. The first one occurred in the early 80s while the second recession occurred in the early 2000s and continues up to date. During the first recession, which was in the 1980s, Ronald Reagan was the president of the United States and he felt the loss. He had a big task to pull out the country out of the downturn and make it prosper. When the second one began, Reagan had already left the presidential seat giving way to George bush and up to date, recession continues. Just like Reagan and President Bush, the current president still promises to make the economy rise again but up to today, nothing has happened. (Glasner, 1997)
Huge taxes were the cause of the recession since many people could only afford to buy commodities but could not afford to pay the huge taxes. Reagan ordered for a reduction in taxes and many people traded more raising the economy to where it was before but many people were against especially the democrats. The rise in economy looked like a boom to the economy and by the time Reagan leaving office, other recessions had already cropped out. Lowering or reducing taxes could have led to the boom making it the only boom to occur by that time. Basing facts on the history of the United States and recessions, the country will continue to experience recessions even in the next five years. (Knoop, 2004)
References
McAfee, L. (2009). The US Economy and Introduction to Economic Analysis. Retrieved on 3rd March, available at www.FlatworldKnowledge.com
Rittenberg, L. (2009). Macroeconomics the Big Picture. Retrieved on 1st September, available at www.FlatworldKnowledge.com
Glasner, D. (1997). Business cycles and depressions. New York: Garland Publishing.
Knoop, A. (2004). Recessions and Depressions.Miami: Praeger Publishers.
Zarnowitz, V. (1996). Business Cycles: Theory, History, Indicators, and Forecasting. Chicago: University of Chicago.
